Bracket creep

Progressivity in the individuals’ income tax system is delivered by applying higher rates of tax above different income thresholds. These thresholds do not automatically keep pace with inflation or wages growth.

Bracket creep (also called ‘fiscal drag’) is where a higher tax rate applies to a taxpayer, as their income increases over time, but tax thresholds are held steady. Bracket creep reduces the progressivity of the individuals income tax scales over time. This is because the tax increase for individuals with lower incomes is greater as a proportion of their income than for those at higher incomes.

For some people, particularly those on relatively low incomes, bracket creep may reduce incentives to work. At higher incomes, bracket creep increases the incentives for tax planning and structuring, and even overseas relocation. Bracket creep diminishes progressivity, and exacerbates the other problems in the individuals income tax system, such as reward for effort and incentives for tax planning, over time.